Copper Leads the Way Lower for Bond Yields

By Tom McClellan

Copper Leads The Way Lower for Bond Yields

Copper prices versus China 10-year bond yields
December 29, 2016

Just a week ago, China was facing a banking system crisis that necessitated an injection of 375 billion yuan ($53 billion) into the money market, and that was after the prior week’s injection of 250 billion yuan ($36 billion).  But now, after Christmas has passed, the crisis seems to be abating.  That is good news for bond prices worldwide, including in the U.S.

And the resolution was foretold by copper prices, which is the really cool part of this.

This week’s chart compares spot copper prices to the yield on the Chinese 10-year government bond.  There is an obvious correlation, which is nice to know, but that is not what is interesting.  Finding two data series which behave exactly like each other is terribly boring.  There is no insight there.  The fun comes when there are two data series that are almost the same, but one is slightly different, and that one gives insights about the other.

Such is the case with copper versus Chinese bond yields.  It is also the case with gold prices measured in euros versus dollars, for example.  When the two series disagree, one is the expert about where both are headed.  Such is the case with copper prices foretelling moves in Chinese bond yields.

Most of the time, the two move together.  But occasionally they disagree, as is the case just recently with copper prices refusing to confirm the higher Chinese bond yields.  That was a tell that the Chinese bond rate blowoff was nearing an end.

If China’s yield melt-up is really all done, as copper suggests, then so should be the same melt-up in U.S. 10-year yields.

10-year yields China and US

The two countries’ bond yields tend to dance the same dance steps, more or less.  The U.S. 10-year yield has danced a little bit farther on this recent up move than China’s did.  Accordingly, it has farther to fall back again on the reversal.

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Copper Spike

By Tom McClellan

Copper Spike

Copper COT data
November 18, 2016

Investors worldwide have suddenly caught a whiff of inflation, and have overreacted in response.  That overreaction can be seen quite well in the big spike higher in copper prices, a rally which is now starting to be dismantled.

One fascinating aspect to that rally is that it came out of a big symmetrical triangle structure.  Symmetrical triangles carry that name because the slopes of the upper and lower boundary lines are roughly equivalent.  Such triangles are indecision structures, and most often resolve with a resumption of the trend direction which preceded the triangle. But sometimes they can be reversal structures, as was the case this time.

Such triangles are also useful because they can give you a measuring objective for the breakout move.  Find the height of the triangle at the first point when it can characterized gets measured, and then that distance is added to (or subtracted from, for downturns) the price level at which prices break out of the triangle.  In this current case, the height of the spike up move met the upside objective from that triangle, so that task can be checked off the list.

We can also see in this week’s chart that the big money “commercial” traders of copper futures have responded to this price spike by upping their shorts in a big way.

Over the years, the commercial traders have been net long much more than they have been net short, and so just seeing them get up to around a neutral stance has been a pretty good sign of a top for copper prices.  So this latest reading being way up above neutral is a big statement.  Indeed, this is the commercials’ biggest net short position as a group since all the way back at the big 2011 price top.

Also really interesting is how different the price plots look comparing copper prices in dollars versus in Chinese yuan:

Copper prices in yuan

The dollar price plot has broken its long downtrend line.  But the equivalent line in the plot of copper priced in yuan has not been broken.  I view that as a big non-confirmation, and expect to see most or all of this spike get given back.

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